Counting the cost of mandatory reporting

Mandatory carbon reporting is looming – but opinion remains divided over whether this additional regulation is an effective way of driving emissions down or just extra red tape. Mike Scott reports

The UK Government will decide shortly whether to force companies to report on their greenhouse gas emissions, with a view to bringing in new rules by April.

As part of its obligations under the 2008 Climate Change Act, the Government has to decide whether to introduce mandatory carbon reporting by April 2012. The Department of Environment, Farming and Rural Affairs (Defra) outlined a series of options, ranging from a mandatory requirement on all large companies to report their emissions to a continuation of the present voluntary approach to reporting.

Views on mandatory reporting are mixed, with some people complaining that it would add another layer of regulation to companies that are already struggling to keep up. “We believe that less regulation rather than more is what is needed in the world of corporate reporting,” says the consultancy Deloitte in its submission to consultation. “We do not think the time is right to introduce mandatory carbon reporting.”

There is a need to balance the value of mandatory disclosure against the burden that comes with it, adds Richard Spencer, head of sustainability at the Institute of Chartered Accountants of England and Wales. “It is not the cure-all that some people suggest. This is quite a new area where best practice is still evolving and a high level of regulation will discourage different approaches and a culture of innovation. Our position is to encourage high-quality voluntary reporting.”

There is a danger that mandatory reporting will create a culture of ‘boilerplate’ reporting where everyone does the bare minimum and bring in companies in sectors that are not that emissions-intensive, he argues. There is also an argument, as a result of the requirement in the Companies Act that companies provide “a description of the principal risks and uncertainties facing the company,” that businesses should already be disclosing sufficient information to allow investors to make investment decisions says Deloitte.

However, leaving the decision to companies’ discretion creates the danger that organisations will choose to ignore the issue. “The current level of reporting is based on what companies consider to be issues material to their business,” the firm’s submission says. “Hence the real challenge is whether companies are appropriately assessing risks to their business and whether climate risk or carbon is one of the top risks for the company. We feel that the risks to a business associated with climate change are often underestimated.”

Organisations such as the Confederation of British Industry (CBI) are in favour of a mandatory requirement, as long as the Government takes the opportunity to align it to existing emissions regulations such as the Carbon Reduction Commitment (CRC) and the European Union’s Emissions Trading Scheme (ETS). “Mandatory carbon reporting is a great way of making boardrooms aware of the savings possible through energy efficiency,” says Rhian Kelly, CBI director for business environment. “To be effective, it is important that the Government phases in the introduction of mandatory reporting and makes the process simple for companies to follow.

“Given that many companies already report their emissions under other schemes, the Government should get rid of overlapping regulations so firms don’t end up getting bogged down reporting for a variety of different schemes.” Specifically, the CBI says that reporting should be mandatory for CRC and ETS participants but the CRC performance league table should be scrapped.

The think-tank Policy Exchange goes further, arguing that the entire CRC, which it calls “unfair, complex and unnecessary”, should be abolished and replaced with a mandatory carbon reporting regime and a clearer carbon price. In a report entitled ‘Boosting Energy IQ: UK energy efficiency policy for the workplace’, report author Guy Newey says: “Making the biggest 24,000 companies and largest public sector organisations publically reveal their emissions fits in with the government’s transparency agenda. It will help ensure organisations realise where they are wasting energy. It will also allow private firms, charities, non-governmental organisations and investors to use the data to compare businesses’ ‘green’ credentials.”

The issue of comparability provides a strong argument for mandatory reporting. There are a number of avenues through which companies currently report their emissions, from the ETS to the voluntary Carbon Disclosure Project (CDP), which all have different boundaries and look at different elements of the business, increasing the reporting burden for business.

According to the CDP, while 62% of companies in the FTSE All-Share Index report some emissions data, only 22% do so in a way that enables comparison with other enterprises. “Mandated disclosure seeks to create comparability of information. If information is in the public domain, stakeholders will ask questions around it and there is evidence to suggest that it will drive improved performance,” says Alan McGill, a partner in the sustainability and climate change practice at PwC.

There are three aspects to consider, he adds. “Firstly, what impact does reporting have on companies? Will the fact of reporting help to drive emissions reductions? Secondly, if companies do start to report, will it lead them to implement a GHG reduction strategy? And what is the cost benefit equation of all this?” There is very little concrete evidence in this area, particularly when it comes to the benefits side of the equation, McGill points out. “It is fairly easy to calculate the costs in relation to collection and monitoring of data and having it verified, but when it comes to benefits the picture is less clear.”

Direct benefits related to lower energy costs are easy to measure, but to what extent can these be directly attributable to reporting, he asks. Then there are the intangible benefits that improved transparency brings in terms of strengthening the brand, improving employee engagement and retaining the loyalty of customers. “These things can be very important, but they are incredibly difficult to quantify.”

Defra calculated that mandatory reporting would cost large companies £6B over 10 years and lead to benefits of just £1.36B. But the Aldersgate Group, a coalition of business leaders, politicians and environmental groups, says that Defra has overestimated the costs of mandatory greenhouse gas reporting for large companies (option 3), by up to £4.6B and underestimated the benefits by up to £980M.

“This is due to omitting benefits, assuming disproportionate efforts required for complying and disregarding temporal effects,” the group says. “Overall, Defra’s impact assessment has taken a fairly narrow focus when looking at benefits, rarely taking into account wider social and environmental benefits that arise.”

Defra, which will announce the option that it will choose in October or November, seems fairly relaxed about having its assumptions challenged. “We invited responses to our cost-benefit analysis and we welcome the submissions we have received,” says a spokesman.

Untangling the current policy jumble would allow the market to decide where the cheapest carbon reductions can be made, says Policy Exchange’s Newey. “Introducing mandatory reporting will allow businesses to get a reputational boost from green action. It will also allow investors and consumers to cut through the greenwash and make more informed choices.”

Consumers, businesses and governments around the world are stepping back from concern about climate change, according to a recent survey by AC Nielsen, partly because they are more worried about the more obvious issues relating to the financial crisis and the economy and partly because there is a realisation that other issues such as resource constraints, water and air pollution (even if they are partially caused by climate change) are more immediately pressing. The Government’s initiative does therefore beg the question – why focus only on carbon – particularly at a time when the International Integrated Reporting Committee is about to launch a pilot framework for reporting that would allow business to report on all their material issues?

An evolutionary approach is needed, argues ICAEW’s Richard Spencer. “Let’s start with something that we know about. The challenge of reporting on everything at once would just be mind-boggling.” Perhaps more important in the short term is how the scheme will be affected by the coalition’s “one in, one out” rule on regulations. “What would they drop to accommodate this?” asks McGill.

A number of observers feel, like the CBI, that the plans should be linked to the CRC and the ETS. It would then be possible for the Government to claim it is amending existing legislation rather than creating new laws.

“If there is strong support from constituents for mandatory reporting, this should apply for at least a transitional period only to companies that are participants in the CRC or the ETS, and hence able to implement the additional reporting requirements without undue cost or effort,” says ICAEW in its submission to the consultation.